1.2_Business Entities.pdf

Unit 1.2 Types of business entities Topic 1: Introduction to Business Management Unit content Assessment Content objective Distinction between private and the public...

Unit 1.2 Types of business entities Topic 1: Introduction to Business Management Unit content Assessment Content objective Distinction between private and the public sectors AO2 The main features of the following types of organizations: Sole traders Partnerships AO3 Privately held companies Publicly held companies The main features of the following types of for-profit social enterprises: Private sector for-profit social enterprises AO3 Public sector for-profit social enterprises Cooperatives Unit content (continued) Assessment Content objective The main features of the following types of non-profit social enterprises: AO3 Non-governmental organizations (NGOs) Business Management Toolkit Porter’s generic strategies STEEPLE analysis Types of business entities and the Business Management concepts Distinction between the private and the public sectors Over to you 1. What do these Answer businesses sell? 1)Postal/logistics services sold by both companies 2)DHL – private individuals, Canada Post – 2. Who owns these government of Canada businesses? 3)DHL – profit, Canada Post – provision of essential 3. What is the main mailing services objective of these businesses? Private vs. public sectors Businesses can be Private sector Organizations owned and categorised into controlled by private individuals private or public and businesses. sector organizations Main aim - to make profit. depending on: who owns them. their main business Public sector Organizations owned and objective. controlled by the government. Most businesses are Main aim - to provide essential goods and services. in the private sector. Over to you Hoang textbook Question 2.1 The private and public sectors Page 22 Answer all parts The main features of the following types of organizations: Sole traders Partnerships Privately held companies Publicly held companies Profit-based organizations These are revenue generating businesses with profit objectives at the core of their operations. Their goals are to: Make a profit. Reward the owners with profits from the business. Return some of the profits back into the business for capital growth. Sole traders These businesses are owned by individuals who own and run a personal business. This is the most common type of business ownership as it is relatively easy to set up. Start-up capital is usually obtained from personal savings and borrowing. Sole traders have unlimited liability.  Unlimited vs. limited liability When deciding on which type of organization to set up, an entrepreneur needs to consider whether or not to incorporate the business to benefit from limited liability. This video explains what it means to have limited liability (0:00 to 0:42). Sole traders Advantages Disadvantages Few legal formalities Unlimited liability Profit taking Limited sources of finance Being your own boss High risks Personalised service Workload and stress Privacy Limited economies of scale Quicker decision-making Lack of continuity Over to you Hoang textbook Question 2.2 Flowers by Cam Page 24 Answer all parts Partnerships Partnerships are owned by two or more persons (known as partners). At least one partner must have unlimited liability. Start-up finance is raised mostly by personal funds which are pooled together by the partners. A legal document known as a deed of partnership is drawn up to formalise agreements such as how profits and losses are to be shared between partners. Partnerships Advantages Disadvantages Financial strength Unlimited liability Specialisation and division of A lack of continuity labour Prolonged decision-making Financial privacy Lack of harmony due to Cost-effective disputes/disagreements Over to you Hoang textbook Question 2.3 EXP: The Chinese Experience Page 26 Answer all parts Limited liability companies These are businesses owned by their shareholders. Shareholders have invested money to provide capital for a company. Companies are incorporated businesses. In the eyes of the law, the companies are treated as a legal entities separate from its owners. This means they have limited liability. There are two types of companies – private held and publicly held companies. Over to you Hoang textbook Question 2.4 Mars Inc. Page 29 Answer all parts Answers: 1. Private Limited Company means that Mars Incorporated is owned by shareholders although the shares cannot be openly traded on a stock market. All shareholders of the business have limited liability since the company and its owners are treated as separate legal entities. 2. The discussion should consider the (dis)advantages of both private and public limited companies. For example:  Private limited companies cannot raise share capital from the general public since these are only sold to personal family members and friends. This clearly limits the finance that Mars is able to raise to compete against rivals such as Nestle and Cadbury’s. However, this fact also means that the directors (members of the Mars family) can maintain overall control of the business. For this reason, many private companies are run as family businesses and without the threat of a takeover (acquisition). Although it is unlikely to be a real issue for Mars, there are financial implications of transforming to a public limited company, such as the cost of flotation (e.g. advertisements, prospectuses, auditors and accountants) and the need to make financial accounts available to the (increased number of) shareholders. By contrast, Mars could raise a colossal amount of capital by selling shares on a stock exchange. With its global reputation, an initial public offer from Mars is likely to attract major attention of private and institutional investors. However, there will be greater pressure from shareholders to receive dividend payments and this can be made more difficult if a non-family member is on the Board of Directors. For personal and historical reasons, the Mars family may be very reluctant to float their company, irrespective of any financial benefits that could be reaped.  How are marks awarded? (10-mark question) Award up to 5 marks for points that are explained but not written in the context of the company OR if a one-sided argument is provided Award 6-8 marks for good discussion that considers the costs and benefits of changing to a PLC, with appropriate application made to Mars Incorporated. [8 marks] We will practice exam writing strategies at a later time, so don’t worry. Just keep this in your mind for now. Privately held companies A privately held company’s shares are owned by friends and/or family. These shares cannot be traded publicly on the stock exchange. Shareholders can only sell their shares if they have prior permission from other shareholders. Typically, privately held companies are also family businesses. Mars, Aldi, and IKEA are all family businesses incorporated into privately held companies Publicly held companies A publicly held company can sell shares on the stock exchange. Shares are held by the general public. No prior permission by other shareholders is required for a shareholder to sell their shares. Honda Motor Company, Ltd., The Walt Disney Company, and Facebook Inc. (Meta) are all publicly held companies. Limited liability companies Advantages Disadvantages Raising finance Communication problems Limited liability Added complexities Continuity Compliance costs Economies of scale Disclosure of information Productivity Bureaucracy Tax benefits Loss of control The main features of the following types of for-profit social enterprises: Private sector companies Public sector companies Cooperatives  Costs Revenues For-profit social enterprises These are revenue e.g. Goods generating enterprises with social objectives at the core e.g. Salaries of their operations. Services Their aims are to: Make a surplus (i.e. earn Rent Other revenue revenue greater than streams costs incurred). Use the surplus for the benefit of society.  Private sector for-profit social enterprises These enterprises operate in a similar way to traditional for-profit businesses. They aim to make a surplus instead of relying on donations to achieve social aims. These firms produce goods and/or services and compete with similar businesses. They often use the triple bottom line as an This Saves Lives is a private sector for-profit social enterprise accounting framework for that aims to earn a surplus to end severe acute malnutrition in ethical business practises. children.  Niagara Falls attracts about 13 million tourists each year. Ontario Niagara Parks Commission was established by the Canadian government to manage the Canadian side of Niagara Public sector for-profit Falls, with a focus on reformed land use and sustainable tourism. social enterprises These enterprises are state- owned to operate in a commercial way. They help to raise government revenues to provide essential services to society that may be inefficient and undesirable if left solely to the private sector.  Cooperatives Owners of cooperatives are called members. Members own and run cooperatives (i.e. they are also employees of the organization). Their aim is to create value for members by operating in a socially responsible way. All employees have a vote to contribute to decision-making. Any profits earned are shared between their members.  GlenWyvis Distillery GlenWyvis Distillery (GWD) is a Scottish cooperative established in Dingwall in 2015 The purpose of GWD is to reinvigorate the community and economy of Dingwall through the creation of a distillery owned by local people. Watch this video about GWD. 1. How does GWD benefit its members and the community of Dingwall? 2. How does GWD operate in a socially sustainable way?  Answers: 1. How does GWD benefit its members and the community of Dingwall? “Some of the proceeds get put aside to be used within the community itself rather than going into big investors’ pockets. In terms of community benefit, the prospect of the creation of local jobs and more tourism is an opportunity to put Dingwall on the map.” (1:21 – 1:33) 2. How does GWD operate in a socially sustainable way? “The whisky industry in general, is quite a dirty industry. It traditionally uses oil and gas to power it. We’re going to resist that trend by generating our own electricity” (1:35 – 1:44) Cooperatives Advantages Disadvantages Incentives to work Disincentive effects Decision-making power Limited sources of finance Social benefits Slower decision-making Public support Limited promotional opportunities The main features of the following types of non-profit social enterprises: Non-governmental organizations (NGOs) Non-governmental organizations (NGOS) An NGO operates in the private sector. They provide goods and/or services normally expected from the public sector. However, these goods/services may be underprovided by governments. UNICEF #foreverychild Watch this video of UNICEF and: 1. Identify as many possible goods/services provided by UNICEF. 2. Go to www.unicef.org and identify other goods and services that are provided by UNICEF. 3. Why are some of these goods and services underprovided by the public sector in some countries? Theory of knowledge Can we really ‘know’ if for-profit organizations do not care about society as much as non-profit social enterprises?  Factors affecting choice of business Amount of finance Size Limited liability Degree of ownership and control The nature of business activity Change Concepts in BM: Selecting the type of organization when forming a business is based on creativity creativity Sustainability in establishing a business Imagine you would like to start your own business. Based on your answers 1. What kind of business would you like to start-up? to these questions, what 2. How much finance can you raise as start-up capital? type of organization i. Think about how much you have in savings and can would you adopt for your potentially borrow from family and friends. business? 3. Are you willing to co-own the business with others? Explain why you have 4. How big will your new business be? chosen this sustainable i. For instance, if you want to open a café, how many business start-up. seats would you like to have available for customers? 5. Where do you see your business in 5 years time? Over to you Hoang textbook Review Questions Page 37